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CMHC mortgage guarantee puts taxpayers at risk: OECD

The federal government needs to limit the percentage of a mortgage loan it is willing to insure against default in order to protect taxpayers, says OECD

The federal government needs to limit the percentage of a mortgage loan it is willing to insure against default in order to protect taxpayers if the overheated housing market goes bust, according to a new report on Canada by a major international think-tank.
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By The Canadian Press

Wed., June 11, 2014

OTTAWA—The federal government needs to limit the percentage of a mortgage loan it is willing to insure in order to protect taxpayers if the overheated housing market goes bust, according to a new report on Canada by a major international think-tank.

In the first major survey of the Canadian economy in two years, the Organization for Economic Co-Operation and Development takes particular aim at risks in the housing market, while also chiding the country’s environmental record, the oilsands and skills training.

The report — which contains a dedication to the late finance minister Jim Flaherty from the group’s secretary general, Angel Gurría — is mostly complimentary about the state of the Canadian economy but raises a number of concerns, including growing inequality, the two-speed economy and Canada’s environmental record.

It takes special aim at the housing market, particularly increasing unaffordability in certain big cities like Vancouver, and high household debt which leaves families vulnerable to interest rate hikes.

“Almost 40 per cent of the country’s population lives in a city where house prices are seriously or severely unaffordable,” it states. “A shock to even one segment could have spillover effects to the broader economy if banks respond by tightening credit significantly or if negative wealth effects depress consumption.”

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Given such risks, the OECD wonders why the government allows Canada Mortgage and Housing Corp. to insure 100 per cent of high-leverage mortgages when most other countries limit potential losses to 10 to 30 per cent of outstanding balances.

“Imposing a deductible on mortgage insurance, as is common in other lines of insurance, would help promote stability by better aligning the interests of the lenders and those of the insurer, thereby reducing moral hazard,” it recommends.

“Over the longer run. the insurance activities of CMHC could be privatized, shifting the government’s role to one of guaranteeing only against catastrophic losses,” it added.

Speaking to reporters at International Economic Forum of the Americas in Montreal, Gurria said he wasn’t overly worried about a housing market crash in Canada.

“The concern more than a crash is about affordability,” he said.

Former finance minister Flaherty had also speculated about privatizing the Crown corporation, and Ottawa has taken steps to rein in its activities, including the most recent announcement that it would no longer insure condominium construction. It has also dropped insurance on second homes.

One danger of the government-backed safety net is that lending standards are reduced since banks are protected against default.

Finance Minister Joe Oliver has come under pressure to intervene in the market after recent moves by Canadian banks that have taken five-year fixed rates below three per cent. But, speaking in New York, the minister downplayed the danger saying rates had not come down very much.

“We don’t believe there is a major problem,” he said.

The wide-ranging report analyses most economic and fiscal issues facing the country and expresses concern over the lack of skilled workers for some sectors in some regions, particularly resource-rich Alberta and Saskatchewan.

In a separate paper, the OECD says federal and provincial governments must co-operate with local authorities and schools in educating and training Canadians for the jobs that are in demand.

“Skills shortages in certain fields and regions could limit growth going forward,” it warns, adding that the average apprenticeship completion rate was only 50 per cent between 2000 and 2011.

The OECD says some of the problem could be ameliorated by better data on job vacancies — a point made again Wednesday by economist Don Drummond in a paper for the Institute for Research in Public Policy.

In the Commons, opposition MPs criticized the government for slashing funding on labour information gathering by 20 per cent, saying it shows the government’s is not interested in reliable data to guide its Temporary Foreign Workers program.

The OECD was also critical of Canada’s environmental record, calling the expansion of the oilsands in Alberta the principal reason the country won’t come close to meeting its 2020 target on reduction of greenhouse gas emissions. That’s because oilsands expansion is projected to increase oil and gas emissions by 23 per cent by 2020.

It recommends that Canada increase the pricing on carbon emissions, noting that currently it has one of the lowest effective tax rates on carbon among industrialized countries.

“We are on a collision course with nature,” Gurria said of the report’s findings. “We cannot sustain long-term growth in our economies if we do not protect and preserve our environment.”

Generally, the OECD says Canada’s economy is doing relatively well with expected growth rates of 2.5 per cent this year and 2.7 per cent in 2015.

But it warns that inequality is rising and that it is increasingly becoming a two-speed economy, as Bank of Canada governor Stephen Poloz has described it, with resource-rich regions doing well at the expense of other regions.

“The emergence of low-cost competitors in emerging economies and exchange-rate appreciation resulted in slower growth in the manufacturing-based economies of Ontario and Quebec,” it said.

It didn’t limit its criticism only to the federal government. The OECD also chided oil-producing provinces for not taxing its producers sufficiently and for not socking away enough of the revenues from non-renewable resource extraction for future generations, as Norway has done.

With files from Ross Marowits in Montreal

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